Sweden: Details on the New 20y Bond

Today the Swedish National Debt Office (SNDO) published details on the new 20y government bond. The bond, named SGB1056, will mature on 1 June 2023, and it will be introduced through a syndication in switch auctions scheduled for the week beginning 12 March 2012. The SNDO buys the 8y and 10y bonds, SGB1047 and SGB1054, and sells the new bond. The switches will be made in notional terms, i.e. buyback of the same notional amount of SGB 1047 and/or SGB 1054 as issued in SGB 1056. Investors may choose any combination of the two bonds. The coupon will be set at the time of launch, the lead managers will announce such information. The Nasdaq OMX Fixed Income index and the Handelsbanken index will be updated at the time of launch.

As an effect from the introduction, new risk will be issued to the market. The SNDO has set the size of issuance in the interval, SEK10 to 20bn. This is equal to net issuance of - in terms of risk (bpv) - SEK6-11bn of the current 10y benchmark, SGB1054. The pace of issuance in nominal bonds in the ordinary auctions is currently less than SEK2.5bn every fortnight, so viewed in relation to that a lot of risk will be issued at one time. Important to note is that the switch will result in a greater funding need for the debt office since the two bonds which will be bought back are trading well over par, roughly 125% and 117% respectively. 

The launch of the 20y bond has spooked the market for some time now. Swedish long rates have underperformed quite dramatically since the end of last year. We think that the introduction of the 20Y bond will continue to weigh on the Swedish long end until we are past the auction. Historically, the Swedish market has had difficulties absorbing interest rate risk when it occurs in a short period of time, so the market is probably right to be careful. Swedish 10Y bonds have traded weakly relative to German peers and we currently trade at only slightly negative levels. Wednesday’s weak auction was another sign that appetite for long-dated Swedish bonds is currently low.

One way to position for a struggling long end and a declining inflation rate, relative to Euroland, and thus a softer Riksbank, is the 10y/5y swap curve box where the Swedish curve is very flat indeed. See Reading The Markets - Sweden from 10 February for more details. See charts .